House Poor. MarketCheese

The term “house poor” refers to people who spend a significant amount of their monthly earnings on house payments (e.g., paying off a mortgage or rental housing, covering the maintenance and utilities expenses). Otherwise, the term is known as “house rich, cash poor”. As this name implies, house poor people suffer from lack of money for covering their discretionary needs beyond the payments for a house (e.g., for covering transport or recreational expenses).

In order to ease their financial situation, house poor people usually are recommended to:

find a second job or other source of additional earnings;
cut extra expenses as mach as possible;
use the savings or sell some of the assets;
change the living conditions, if possible (e.g., find the more affordable house).

Reasons for becoming House Poor

There are a lot of advantages of owning property. First and foremost, it’s a well-known and reliable type of long-term investments, which won’t lose its profit potential in years. However, there is a downside as well. Homeownership might become a problem when a person loses a job or suffers from financial difficulties. Therefore, people might become house poor.

Except the problem of losing job, there are different reasons for people to become house poor:

underestimating their abilities to pay for the chosen property (e.g., by putting all the money available for the down payment or choosing the wrong mortgage option with unrealistic monthly payments);
losing the previous salary level;
unexpected expenses or increased debt burden (e.g., the dramatic change in housing costs or the person’s thoughtless decisions).

Precautions for avoiding the House Poor condition

Nobody wishes to find themselves in a house poor situation. Therefore, it’s important to be cautious towards your regular spending and financial abilities. Let’s discuss some preventive measures that might help you to avoid this troubled condition:

Make reasonable choices, or think twice before purchasing a house. Some experts believe that a perfectly affordable price for the house is your annual salary multiplied by 2.5. This amount is relatively easy to save, rather than the amount of your 5 annual salaries or even more. You always should take into consideration some unexpected circumstances that might influence your mortgage or rental payments (e.g., the economic crisis, unemployment, health expenses). However, there is another point of view that the formula of multiplying the annual salary by 2.5 isn’t correct, and typically this sum isn’t sufficient for buying the house.

Take attention to the details, or count down your mortgage payments in advance. Before taking the mortgage, take attention to the initial amount of payment that you should pay as well as to its interest rate and overall duration. This decision should be carefully thought through. It’s better if you search for different options on the market and take time for counting down your ability to pay the debt back. The front-end ratio and back-end ratio might be of great assistance to you in this process. The first ratio defines how much of your gross monthly income will be taken out by the future house expenses. The latter one defines which part of the monthly income will be taken out of your budget by the whole amount of debt (including the future mortgage payments). Typically, the optimal level of the front-end ratio is about 28%. The back-end ratio shouldn’t be above 36%. If any of these ratios is above the stated numbers, a person might be considered as house poor.

Make savings, or prepare yourself for unforeseen circumstances. Always try to save some money, if possible. This habit might be more than useful in cases of unexpected expenses or financial emergencies. However, it’s important to define which types of expenses are viewed as urgent. Try to leave your savings untouched for anything else. The amount of these savings is still a controversial question, but some experts insist on that they should be about your usual living expenses for a month multiplied by 3-6 months.

Ways of overcoming the House Poor condition

If you fail to avoid becoming house poor, you might consider the following options (some of them have already been briefly mentioned):

Reduce spending. In order to cover the house payments, try to limit some of your unnecessary and less urgent expenses. For example, you might reconsider your vacations, gym membership, or shopping needs. These temporary financial restrictions can help you to overcome the house poor condition and get back to normal spending.
Increase earnings. Find an additional source of income that will cover your house expenses. It might be a second job, side job, or even garage sale – find the most convenient way to increase your income for solving money problems.
Use savings. If you have some money as a financial safety net, you might contemplate the possibility of dipping into these savings in the house poor situation. This extra money might save the situation and protect you from debts. However, when the situation get stabilized, don’t forget to replenish your saving account.
Sell a house. This option might not be the best out of this list, but it’s still worth consideration, because if the house is the source of your financial problems, it might be reasonable to switch it for a more affordable alternative. Eventually, you’ll be able to save money for another house without a strict budget limitation.